The biggest US oil basin is headed for slower – but still robust – growth

How much oil does an oil well produce?

In the life cycle model of a typical Permian oil well, “production usually peaks a month after the start of production but declines fast afterwards to modest and roughly flat production in three-four years,” Yulia Grigsby, an energy economist in Goldman Sachs Research, writes. The annual average production growth in the maturing Permian basin is likely to gradually decline from an exceptionally strong 520,000 barrels per day in 2023 to 340,000 barrels per day this year, and to a still robust 270,000 barrels per day in 2026.

There are two key reasons for the Permian’s slowing growth:

• Geology: Years of intense exploration and production have had an impact on the rock quality of the basin, leading to geological deformations that limit further improvements in the productivity of oil wells. The most productive wells are also getting depleted. This weighs on the initial production of new wells. Goldman Sachs Research expects the initial production of wells to rise by 100 barrels per day this year but forecasts a slowdown in growth to 50 barrels per day in 2025-2026 – only a third of the growth seen in 2019.

• Rigs: The Permian weekly rig count has dropped nearly 15% from last year’s April high, and is down 30% from its 2018-2019 average. Goldman Sachs Research expects that trend to continue this year. The rig count will likely keep edging downwards, from 309 today to fewer than 300 by the end of 2026. But output per rig will keep growing, as industry consolidation increases the share of more productive rigs, and as technologies improve.

What is the future of US crude oil?

Although slowing, the growth of Permian production will remain robust through 2026. Goldman Sachs Research identifies two chief reasons for this:

• Efficiency: “Drilling and completion efficiency continues to improve via lower drilling costs and shorter drilling and completion times,” Grigsby says. “This year, every stage of a well’s building cycle in the Permian was 20-50% faster than in 2019, with the total average time from rig to production decreasing by a third to 63 days.” This acceleration will boost the share of new and productive wells amid the stock of declining wells.

• Price forecasts: Goldman Sachs Research’s price forecast for West Texas Intermediate oil, for 2024/2025, is $79/$76 per barrel, which is modestly above our analysts’ estimate of $74 per barrel as the breakeven price of Permian oil.

Permian oil exhibits a differential sensitivity to global oil prices. When WTI prices remain above $50 per barrel, a 10% drop in price leads to only a modest average drop of 1.3% in Permian production. If WTI prices are below $50 per barrel, though, that same 10% drop in price triggers a much larger drop of 4% in Permian production. Given Goldman Sachs Research’s forecast of the price of oil, which is well above the $50 threshold over the next 18 months, price swings are unlikely to spark deep cuts in Permian production. 

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